The National Audit Office (NAO) said that ministers had failed to monitor the government’s sixth largest contractor effectively before it went into liquidation with debts of £1.5 billion.

The spending watchdog questioned why the construction company was given public work, including a £1.3 billion contract to help to build HS2, after a profit warning last July. The company had 420 public-sector contracts worth £1.7 billion a year. The scale of its profit warning was a “surprise” to the government, the NAO said.

“Doing a thorough job of protecting the public interest means that government needs to understand the financial health and sustainability of its major suppliers, and avoid creating relationships with those which are already weakened,” said Sir Amyas Morse, head of the NAO. “Government has further to go in developing in this direction.”

The cost to the taxpayer on the losses on Carillion’s contracts since it was put into the hands of the Official Receiver in January is £148 million, the NAO report found. On top of that is an expected bill from PWC of £50 million for handling the first six months of the receivership. That bill is expected to rise as the liquidation process continues.

Frank Field, the Labour MP who leads a House of Commons committee that has issued a report on Carillion and the failings of its directors, said that the NAO report showed how the Cabinet Office had fallen short.

“Carillion hoodwinked the government as they did many others who were so naive as to trust their published accounts,” he said. “At the earlier stages government oversight was inadequate. The government has to up its game.”

The report says that the Cabinet Office employed no direct overseer of Carillion in the three months after the profit warning after the departure from the civil service of the “crown representative” that each major contractor is assigned by government.

Despite the evidence that Carillion was in a crisis from which it might not recover the company was not assigned to the Cabinet Office’s “high risk” red alert until September and contingency plans for Carillion’s failure were not stepped up until October. Even when the company went into liquidation in January, the Cabinet Office still did not have a complete list of the government’s exposure to Carillion and did not have contingency planning in place.

A spokesman for the Cabinet Office said: “Throughout this process the government has been clear that its priority is to ensure that public services continue to run smoothly and safely. The plans we put in place have ensured this, and we continue to work hard to minimise the impacts of the insolvency, having safeguarded over 11,700 jobs to date.”